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Can you trust your trust?

I often consult with trustees who do not understand the fundamental mechanisms of a trust, let alone the reasons why it was created in the first place. More often than not, I come across trustees who manage trust assets at their own whim and preference with absolutely no regard to the very legal doctrines that govern and regulate them.

Nature of a trust:

A trust is an agreement between the founder and the trustees for the trustees to manage the assets in a certain manner that will benefit the trust beneficiaries. The concept of a "trust" originates from English Law and has been regarded as "the most distinctive and creative achievement of English jurisprudence".

Advantages:

There is no doubt that trusts can serve a wide variety of personal needs and desires like the protection of your assets from creditors; providing estate pegging and tax savings; providing financial continuity upon your death; a trust may also serve as an appropriate vehicle for certain business ventures; it can provide financial protection to vulnerable dependants, reckless or extravagant children and beneficiaries with special needs; a trust may also be applied to save on substantial costs associated with the administration of a deceased estate.

The benefits associated with the application of a trust can, however, only be legitimately attained if the trust is managed effectively by the trustees in line with prevailing legislation.

Trustees have onerous responsibilities and obligations:

The Trust Property Control Act 57 of 1988 states that "a Trustee shall, in the performance of his duties and exercise of his powers, act with the care, diligence and skill which can reasonably be expected of a person who managers the affairs of another." [My emphasis]

This is an arduous, objective provision. The duty of care, diligence and skill required by a trustee is that of a reasonable person managing the affairs of another. A trustee cannot, as a defence, rely on his lack of skill or lack of proficiency on a particular subject matter or good intent to pass this test. There is no place in our law for a sleeping trustee.

Any provision contained in a trust instrument shall be void insofar as it would have the effect of indemnifying a trustee against liability for a breach of trust where he fails to show the degree of care, diligence and skill as required.

Once you become a trustee it is important to note that you cease to be under the instructions or commands of your client or the founder. The appointment of trustee means that you would now have to act in the best interests of the trust's beneficiaries as per your duties in terms of the trust deed and the law.

In the case of PPWAWU National Provident Fund v Chemical Energy Paper Printing Wood and Allied Workers Union 2008 (2) SA 351 (W) the court said that the trustee's obligation to exercise an independent judgment, regardless of the views of the trade union (or employer) which appointed him is analogous to the director's obligation to exercise an independent judgment, regardless of the views of any party which may have procured his or her appointment as a director. The Court held that, by following the union's policy, the union-appointed trustees had acted in breach of their fiduciary duties to do the best that they could for the beneficiaries.

Trusts are heavily regulated contrary to popular belief of them being wishy-washy. Trustees need to understand and appreciate what is required from them on an on-going basis. The Trust Property Control Act regulates trusts, and so too does the common law. Apart from regulations, trustees must be well acquainted with the trust deed. The trust deed is the constitution or charter of any trust. When trustees act contrary to the provisions of the trust deed, their acts are ultra vires and invalid. The general rule is that if a trust deed does not contain an express or implicit power which allows the trustees to pursue a certain risk activity, the trustees have no entitlement in law to proceed with such an activity.

A trustee must not without the written consent of the Master destroy any document which serves as proof of the investment, safe custody, control, administration, alienation or distribution of trust property before the expiry of a period of five years from the termination of a trust.

Trustees hold office and cannot do as they please. Certain rights, duties and obligations flow from the holding of office.

In Doyle v Board of Executors 1999 2 SA 805 (C) the court held that the office of trustee requires of a trustee to act with utmost good faith. The duty of care is the most important manifestation of the fiduciary nature of a trustee's office, it being an accepted principle in our law that a trustee, as any other functionary to a fiduciary relationship, must perform his duties and exercise his powers in utmost good faith.

Discretion does not mean that trustees can do as they please. When exercising discretion, trustees have to consider the needs of all discretionary beneficiaries.

If a trustee fails to perform any duty imposed by the trust instrument, the Master or any person having an interest in trust property can apply to court for an order directing the trustee to perform such duty.

The Trust Property Control Act specifies strict requirements for the valid resignation of a trustee. Whether or not the trust instrument provides for the trustee's resignation, the trustee may resign by notice in writing to the Master and the ascertained beneficiaries who have legal capacity, or to the tutors or curators of the beneficiaries of the trust under tutorship or curatorship. Generally, notice is only given to the Master and fellow trustees but not to the beneficiaries. In such a case, the resignation is deemed to be invalid. This could lead to a very unsatisfactory state of events as the trustee who thinks he is no longer a trustee may very well still be a trustee and the remaining trustees may be signing documents which will effectually be null and void.

The Supreme Court of Appeal has held that a trust is a contract akin to a stipulatio alteri, namely a contract for the benefit of a third party. Therefore, a founder of a trust and a trustee can by agreement between them vary or even cancel a deed of trust before the third party has accepted the benefits conferred on him or her by the trust deed. But once the beneficiary has accepted those benefits, the trust deed can only be varied with his or her consent. The reason is that, as in the case of a stipulatio alteri, it is only upon acceptance that the beneficiaries acquire rights under the trust. Before acceptance, a beneficiary is a contingent beneficiary only. Therefore, a trust deed varied without the beneficiary's consent after the latter has accepted the benefits conferred by the trust deed is invalid. See: Potgieter v Potgieter NO 2012 (1) SA 637 SCA.

You may then ask how does one obtain consent from beneficiaries who have benefitted under trusts where there may be hundreds or even thousands of beneficiaries?

If there is proper representation, the duly appointed representative may consent on behalf of all members who have accepted benefits.

In the case where minors are beneficiaries, the guardian may accept on behalf of the minors.

Alternatively, a notice may be placed in a local newspaper setting out the proposed amendments and calling upon any person who has received benefits to object to the proposed amendments. Should no objection be lodged by a certain, specified date, it may be deemed that that the beneficiaries have accepted the proposed amendments.

The acceptance to be provided need not be in the form of formal, written acceptance. It is important to note that acceptance can be obtained via conduct.

It is also equally important to note that if a guardian or a duly appointed representative is representing the beneficiaries that they do not accept if such acceptance will be contrary to the interests of the beneficiaries.

The Supreme Court of Appeal in Land and Agricultural Bank of SA v Parker 2005 (2) SA 77 (SCA) said family trusts should not be controlled solely by family members who are beneficiaries. The Master should ensure that an independent outsider is appointed as trustee to each trust in which (a) all the trustees are beneficiaries; and (b) all the beneficiaries are related to each other. This outsider-trustee should be someone who with proper realisation of the responsibilities of trusteeship accepts office in order to ensure that the trust functions properly, that the provisions of the trust deed are observed, and that the conduct of trustees who lack a sufficiently independent interest in the observance of substantive and procedural requirements arising from the trust deed can be scrutinised and checked. Such an outsider will not accept office without being aware that failure to observe these duties may risk action for breach of trust.

No trustee has any power to act until he has been formally appointed by the Master of the High Court. Any action taken by a trustee prior to his appointment is void.

Trustees must keep an asset register in accordance with section 11 of the Trust property Control Act.

Beneficiaries with contingent rights are always entitled to information.

A "business trust" is not a separate animal. A trust is a trust irrespective of what you call it. The only difference between a business trust and a family trust is that the trustees to a business trust are empowered to carry on business activities in accordance with the trust deed. Trustees to a business trust are not exempted from the usual trustee duties as set out under the common law or under the statutes.

Be vigilant that your business trust is seen as a trust and not as a "partnership". See for example Adcock v Adcock and Others (3617/09) [2012] ZAECPEHC 28 where the plaintiff, upon divorce, opted to sue the defendant not for her share of the accrual but rather on the alleged existence of a universal partnership that existed between her, her former husband and the trust. The purpose of the partnership, the plaintiff maintained, would have been for the joint benefit of the plaintiff, her former husband and the Trust, with the express purpose of making profits - upon the marriage being terminated it was an implied term that the partnership would be terminated and its nett asset value distributed equally between the partnerships according to the partnership ratio.

The trust itself cannot be sued as it is not recognised as a legal person in South Africa (unless a statute defines it as such). It is the trustees in their official capacity who will be sued.

The Master of the High Court is not an adjudicator. It is merely a record keeping office. Just because he may sanction something does not mean that the sanctioned document is valid and legal. A court will not entertain a defence that the acts of trustees were valid and lawful because the Master of the High Court subsequently approved the application. The onus rests on trustees to know the law and act in accordance with it.

Often a founder loans money to his trust. When doing so always reduce the loan agreement to writing. Our courts always look for "substance" over "form" and prefer giving greater weight to the substance of a transaction over its form because the latter may be easily manipulated or used in self-serving fashions. These days many donations are disguised as loans. If the terms of the loan agreement is to be a loan repayable on demand which is to be interest-free upon such demand, make sure that this is reduced to writing. This is essential.

Do not use legal jargon without understanding its full import.

In the case of Raubenheimer v Raubenheimer and Others 2012 (5) SA 290 (SCA) the Supreme Court of Appeal held that the word ‘usufruct' is often loosely used, and its use in a will does not necessarily mean that a testator appreciated its legal significance. The court in this matter was satisfied that the will created a fideicommissum over the common home with the appellant as the fiduciary until her death or remarriage whereupon the property was to pass to the respondents or their children.

There are many reasons to create and use a trust during your lifetime. One must do an exercise to ascertain whether the value in placing assets in the trust outweighs the costs and tax implications associated therewith. In many cases, the advantages sought from the trust are far greater than the initial costs.

Very often, surviving spouses end up competing against children and grandchildren in a trust. If a founder intends for a certain beneficiary/ies to be preferred over others, it may well be imperative to insert this in the trust deed. It is perfectly permissible to rank or qualify certain classes of discretionary beneficiaries over others, provided the trust still remains a discretionary trust (i.e. that the nature of the trust is not changed).

It is standard practice for trust practitioners to request auditors to provide them with letters of acceptance of appointment as accounting officers of trusts in cases where the trust deeds provide for the accounting of trusts. The standard letter indicates that the auditor accepts his appointment and that he will also advise the Master immediately should he no longer act as auditor. Recent complaints were lodged by the Master that auditors do not fulfil their obligations in terms of their undertaking. In particular, they do not advise the Master when they cease to act or when they have not performed any form of service for the previous twelve months. The Independent Regulatory Board for Auditors (IRBA) has resolved to take disciplinary steps against accountants who fail in their duties in this regard.

The founder may still retain a veto right. The important aspect is that the founder must not be seen as conferring a benefit upon himself. A veto right allows its holder to protect the status quo.

Why do trusts fail?

Many people do not understand the true nature of trusts, what they mean and what they were intended for. This leads to reckless administration by trustees who stand the risk of landing up in court.

Many trustees conduct their duties in a nonchalant manner thinking that they are not regulated at all leading to reckless, negligent or uninformed administration.

Many planners wish to retain control over trust assets and fall foul to the separation of ownership and control requirements required of a trust. In Parker (supra) the court found that the core element of a Trust is that there should be separation of ownership (or control) from enjoyment of the Trust assets. If a planner transfers assets to a Trust but continues to deal with those assets "as before" there can be no separation of ownership. The Trust will therefore offer little in the way of protection. The trust will be seen as the "alter ego" of the founder.

Business enthusiasts who form trusts do not realise that they have additional duties in terms of trust regulations.

Many trust deeds are not formed correctly and lack essential elements. A clearly defined trust objective is always discerning to articulate - trustees should have direction in the accomplishment of their duties otherwise they may very well act ultra vires. A failure to contain a trust objective, in an ordinary trust, however, will not render the trust invalid provided there are ascertainable beneficiaries to the trust.

It is very important to note that a trust without any beneficiary is no trust at all. Such trust ceases to exist.

Trustees ought to know the law. If you do not understand the true nature of a trust as being one of a contract stipulatio alteri, any amendments subsequently made thereafter will be null and void.

A trust is meant to offer protection of assets. Many founders place assets in trusts but defeat this object by signing personal surety. When this is done, creditors have recourse against the founder.

In Slip Knot Investments 777 (Pty) Ltd v Du Toit 2011 (4) SA 72 (SCA), the defence of iustus error was taken on appeal to a claim seeking to enforce an agreement of suretyship. The respondent although admitting that he signed the deed of suretyship, denied that he was liable and averred that he signed by mistake and without the intention to incur personal contractual liability. The Supreme Court of Appeal rejected the arguments advanced on behalf of the Respondent.

A founder need not divest himself so vigorously so as to exclude himself from being a beneficiary. This is not necessary.

The capacity defining clause in a trust deed has a very important significance. If a trust deed dictates that you must at all times have a certain number of trustees in office, any decision taken by fewer trustees will be null and void.

It is important to note that a trustee may delegate powers to another but he may not abdicate powers.

In Hoosen and Others NNO v Deedat 1999 (4) SA 425 (SCA) the Supreme Court of Appeal emphasised that a trustee may not purport to appoint someone else and in doing so procure his own release from the inherent responsibilities of a trustee. This case dealt with the question of whether a trustee could delegate his powers through a power of attorney to a non-trustee. The court held in this case that the powers of a trustee could not be delegated to a non-trustee where the trust deed did not specifically allow for this. The court held that a trustee who is chosen by virtue of some special quality or ability may not delegate trustee's powers, authority or duties to anyone else. In all other cases delegation is valid but the trustee does not free himself from liability or conduct of the person appointed to act for the trustee.

Many trustees do not know the law and do not stay abreast of changes to the law. It is advisable to consult with a trust specialist today to ensure that your trust is in good, healthy shape. An admirable reference guide to use on trusts generally is the handbook by Professor Walter Geach and Jeremy Yeats, "Trusts Law and Practice."